9/18/2009 @ 7:00PM

Where Home Prices Are Hitting Bottom

There’s more to indicate that the housing recession has hit bottom than Thursday’s dual announcements that housing starts rose 1.5% from July, and new jobless claims dropped by 12,000 last week.

Homeowners looking to sell are also putting the brakes on the trend of aggressive price cuts, indicating that the real estate market may be closer to salvation than previously thought. In 20 major U.S. housing markets, the percentage of homes that have suffered price reductions is dropping.

Thirty-nine percent of for-sale homes in 20 major U.S. metros have had their prices reduced. That’s a drop of six percentage points, from 45% at the beginning of the year, according to data provided to Forbes by Altos Research. That the number of for-sale homes with startling cuts has dropped is a sign that the real estate market may soon reverse its downward slide.

“The percent of homes on the market with price reductions is a really insightful indicator of organic levels of demand,” says Michael Simonsen, chief executive of Altos Research. “As this number is dropping, there’s improving demand at current prices.”

Realtors and homebuyers have gotten used to a market cluttered with homes whose price expectations have tumbled back down to earth. Currently, a $1.3 million 1950s home in central Washington, D.C., has 42.2% shaved off its original asking price. A designer mansion in Los Angeles may seem exorbitantly priced at $16.9 million, but that’s 32.4% less costly than it was eight months ago. And a modest but presentable Vegas two-bedroom is going for a song at $65,000–55.8% less than its original quote.

Believe it or not, this is all good news. While shrunken quotes like these crop up far more frequently now than they did two years ago, these are only a few standouts in major metro areas that, by and large, are starting to see a reversal of the price-slashing trend.

Behind the Numbers

To find out where home prices are showing signs of recovery, Forbes used data produced by Altosresearch.com, a Mountain View, Calif.-based research firm that tracks the percentage of homes on the market that have seen price reductions. Altos watches these numbers for 20 Metropolitan Statistical Areas: geographic entities defined by the U.S. Office of Management and Budget, for use in collecting statistics. These MSAs were chosen based on the cities used for the S&P/Case-Schiller 20-city home price index, which is used to track U.S. residential real estate trends.

The news is best in Las Vegas, Phoenix and Miami, markets that saw the steepest price inflation a couple of years ago. In these places, the number of cut-price homes is down 24, 18 and 12 percentage points since Jan. 1, respectively.

Although the numbers are still high–40% of Phoenix homes have been discounted, compared to single-digit numbers in previous years–the dramatic reduction in price cuts here is a sign that buyer demand is rising to meet the excess of supply that was caused by irrationally exuberant building practices earlier in the decade.

The cities with the highest number of reduced-price homes are Minneapolis, Seattle and Portland. Although the percentage of on-sale homes in these cities has dropped by 7%, 6% and 4% respectively since January 1, these metros have price reductions on nearly half of all homes on the market.

While in Minneapolis, this may be a product of deeply rooted economic troubles facing manufacturing economies in general, in Portland and Seattle, the high number of priced-to-sell homes more likely reflects the excess housing inventory that the housing bubble brought to the West Coast. While Portland and Seattle were included in the Altos analysis, they were not among the ten cities with the biggest improvements in the percentage of home price reductions.

Cities like Cleveland and Dallas, however, have yet to see major improvement. The percentage of homes with lowered asking prices has stayed flat in the last nine months, at 38% and 44%, respectively. In Cleveland, this could mean that loosening of bank credit, increases in buyer confidence and effects of the government stimulus haven’t successfully tipped the supply/demand balance, so prices are still being slashed aggressively.

But while Dallas has seen a relatively high number of reductions, those reductions are not drastic; Dallas home prices will have dropped less than 1% for the year by the end of 2009, according to data from Moody’s Economy.com.

The Bottom Line

On the whole, these numbers show that excess inventory may be thinning–with realtors confidently holding firm on their prices, sensing that buyers are tiptoeing back into the market. But this newly buoyant buyer sentiment may be partly due to the first-time homebuyers’ tax credit, a measure enacted as part of the Obama administration’s stimulus package that offers an $8,000 tax credit to those buying their first home.

The credit is due to expire on Nov. 30, and while lobbyists for realtors and homebuilders are fighting to extend and expand the benefit, if they are unsuccessful, demand may once again recede, and the number of half-price for-sale signs could once again creep up in many neighborhoods.

“There are more people in the marketplace, because a fair number of them have this $8,000 tax credit behind them,” says David Crowe, chief economist for the National Association of Home Builders. “The demand will fall off when the credit expires, and that could cause a backslide in house prices.”